History 101

LBJ was able to pass JFK’s Tax Cuts resulting in a Long Period of Economic Growth

The official unemployment rate is stuck around 8%. But if you count all the people who can’t find a full-time job the actual unemployment rate is closer to 14%. With every jobs report we hear the positive spin from the government about another down tic in the official unemployment rate. And the hundreds of thousands of new jobs created. But after three years or so of hearing these reports people start questioning the numbers. And the rosy spin. Because despite all the good news they tell us people are disappearing from the civilian labor force. Which is the only reason why the official unemployment rate is falling. Because they’re not counting a lot of unemployed people. So looking at the civilian labor force may be a better indicator of the health of the economy. Or better yet, the civilian labor force participation rate (CLFPR). Which is basically the percent of those who can work that are working. So let’s do that. Starting with the Fifties.

After World War II veterans went to college on the G.I. Bill. These new college graduates with degrees in science, engineering and business management entered the workforce in the Fifties. Helping the United States to develop new technologies. New industries. And a lot of new jobs. American wells were busy pumping domestic oil. Keeping gasoline cheap. Having escaped the damage of war the American economy exported to those countries that didn’t. And consumer spending took off. Thanks to the new advertising industry telling Americans about all the great things to buy. They bought houses and cars with borrowed money. And used the new credit card to spend even more money they didn’t have. Changing the American economy into a consumer-based economy. Making the Fifties one of the most prosperous times in U.S. history. Despite the Korean War. And the Cold War. Which was getting underway in a big way. There was a burst of inflation to help pay for the Korean War. When it ended they contracted the money supply to get rid of that inflation sending the economy into recession. But once the recession ended the economy took off with all that consumerism. Shown by the sharp rise in the CLFPR. To correspond with the very good economic times of the Fifties. Another monetary contraction happened in 1957 to tamp out some price inflation. With a corresponding fall in the CLFPR.

The Sixties started with another recession. After it ended, though, the CLFPR continued to fall. The recession was officially over but the economy was not doing well. The CLFPR fell for almost three years following the recession. Things were different from the Fifties. For one, a lot of those war-torn economies were up and running again. Providing some competition. Especially a little island nation by the name of Japan. Which one day would build all the televisions sold in America. It was because of this fall in economic activity that JFK started talking about tax cuts in 1963. Congress blocked his attempt to cut tax rates. But after his assassination LBJ was able to pass the Revenue Act of 1964. This lowered the top marginal tax rate from 91% to 70%. And lowered the corporate income tax from 52% to 48%. Among other favorable business measures. Resulting in a long period of economic growth. And a long upward trend in the CLFPR.

The Tax Cuts and Deregulation of the Eighties created one of the Longest Periods of Economic Growth

But following the Revenue Act of 1964 came the Great Society. The Vietnam War. And the Apollo moon program. All paid for with a huge surge in federal spending. Deficits began to grow. As the government struggled to pay for everything. And were unwilling to cut anything.

The economy fell into a mild recession in 1970. The CLFPR remained relatively flat. To meet their spending needs they started printing money. Devaluing the dollar. Still part of Bretton Woods the dollar was still pegged to gold at $35/ounce. That is, the U.S. agreed to exchange gold for dollars at $35/ounce. But as they devalued the dollar our trading partners no longer wanted to hold dollars. Because they were losing their purchasing power. They wanted the gold instead. So they began exchanging their dollars for gold. Causing a great outflow of gold from the U.S. Causing a problem for President Nixon. He didn’t want the U.S. to lose all of their gold reserves. But he didn’t want to cut any spending. Which meant he didn’t want to stop printing money. In fact, he wanted to print more money. And the easy way out of his dilemma was by doing the most irresponsible thing. He slammed the gold window shut in 1971. And refused to exchange gold for dollars anymore. And when he did there was no restriction to the amount of money they could print. And they printed it. A lot. Creating double-digit inflation before the Seventies were over. The inflation caused prices to rise. Which Nixon tried to prevent with wage and price controls. Causing a shortage of available rental property as people converted them into condos to get away from the rent control. Gasoline stations ran out of gas as people filled their tanks with below-market priced gas. And meat disappeared from grocery stores. Wage controls kept wages from keeping pace with inflation. So even though people had jobs they lost more and more purchasing power. Or simply found there was nothing to purchase. Throwing the economy into recession in 1973. After the recession the CLFPR grew throughout the remainder of the Seventies. But it wasn’t good growth. It was growth sustained with double-digit inflation. A bubble of artificial economic activity. That would have to crash. As all inflationary periods must crash.

In the Eighties Paul Volcker, Federal Reserve Chairman, raised interest rates to double digits to wring out the double-digit inflation from the economy. To restore people’s purchasing power. And return the nation to real economic growth. The tax cuts and deregulation of the Eighties created one of the longest sustained periods of economic growth in U.S. history. With one of the longest upward trends in the CLFPR ever. Indicating a growing economy. With more and more people who could work finding work. Proving that Reaganomics worked. And worked very well.

If JFK or Ronald Reagan were President Today we wouldn’t be seeing a Freefall of the CLFPR

But it wouldn’t last. Thanks to the government’s interference into the banking industry. They had set a maximum limit on interest rates S&Ls (and banks) could offer. When inflation took off people pulled their money from their savings accounts. Putting it in higher earning instruments. So they didn’t lose their savings to inflation. This bad banking policy begat more bad banking policy. They deregulated the S&Ls and banks. So they could do other things to make up for their lost savings business. And that other thing was primarily real estate. They borrowed short-term money to make long-term loans. Helping to create a housing bubble. And when they began to wring that inflation out of the economy interest rates rose. When those short-term loans came due they had to refinance them at higher interest rates. While the interest they were earning on those long-term loans remained the same. So their interest expense soon exceeded their interest income. Creating the savings and loan crisis. And a severe recession that ended the economic expansion of the Eighties. With a corresponding fall in the CLFPR.

Once the recession ended the CLFPR resumed a general upward growth. But not as good as it was in the Eighties. Also, it would turn out that much of the growth in the Nineties was artificial. Bill Clinton’s Policy Statement on Discrimination in Lending forced lenders to lower their lending requirements. And to qualify the unqualified. Which created a surge in subprime lending. And the beginning of a housing bubble. The Internet entered the economy in the Nineties. Just as the personal computer entered the economy in the Eighties. Making Bill Gates a very rich man. Investors were anxious to find the next Bill Gates. Taking advantage of those low interest rates creating that housing bubble. And poured money into dot-com start-ups. Companies that had no revenues. Or products to sell. Creating a dot-com bubble. And a surge in computer programming jobs. Also, as the century came to a close there was the Y2K scare. Creating another surge in computer programming jobs. To rewrite computer code. Changing 2-digit date codes (i.e., ’78) to 4-digit codes (i.e., 1978).

The Y2K scare proved to be greatly overblown. Which put a lot of computer programmers out of a job in January of 2000. And they wouldn’t find a dot-com job for the dot-com bubble burst in the same year they lost their Y2K job. Throwing the economy into recession in 2001. And then making everything worse came the terrorist attacks on 9/11. Prolonging the recession. As can be seen by the long decline in the CLFPR. Which leveled out after the Bush tax cuts. But then that housing bubble peaked in 2006. And burst in 2007 into the subprime mortgage crisis. Thanks to all those toxic mortgages Bill Clinton’s Policy Statement on Discrimination in Lending forced lenders to make. And because Fannie Mae and Freddie Mac bought these toxic mortgages and had Wall Street package them into collateralized debt obligations this crisis spread worldwide. Selling what they told unsuspecting investors were high yield, low risk investments. Because they were backed by the safest of all loans. Mortgages. What they failed to tell these investors was that these mortgages were not safe 30-year conventional mortgages. But highly risky subprime mortgages. In particular adjustable rate mortgages. Where the monthly payment would increase with an increase in interest rates. And that is what happened. And when it happened the unqualified could not afford the new monthly payment. And defaulted. Kicking off the Great Recession. And because President Obama was more interested in national health care than ending the Great Recession he didn’t cut taxes. Or cut regulations. Instead, he increased taxes and regulations. Making the current recovery one of the worst in U.S. history. As can be seen in the greatest decline in the CLFPR since the Great Depression. If you look at a continuous graph from 1950 to the present you can see just how bad the Obama economic policies are.

The JFK and Reagan tax cuts caused the greatest economic expansions. And the greatest rise in the CLFPR. Also, after most recessions there was a return to a growing CLFPR. Interestingly, the two times that didn’t happen are tied to Bill Clinton. Who created two of the greatest bubbles. The dot-com bubble in the Nineties. And the subprime mortgage bubble that was built in the Nineties and the 2000s. The growth was so artificial in building these bubbles that the CLFPR did not recover following the bursting of these bubbles. It might have following the dot-com bubble if the subprime mortgage crisis didn’t follow so soon after. The current recovery is so bad that it has taken the CLFPR back to levels we haven’t seen since the Seventies. Making the current recovery far worse than the official unemployment rate suggests. And far worse than the government is telling us. So why are they not telling us the truth about the economy? Because the government wants to raise taxes. And if the economy is improving there is no need for recession-ending tax cuts. So they say the economy is improving. As they hate tax cuts that much. Unlike Ronald Reagan. Or JFK. And if either of them were president today we wouldn’t be seeing a freefall of the CLFPR.